The Real Story Behind Managed Services

For more than two years, Business Solutions has been actively promoting the fact that opportunities are growing for VARs in managed services. We're not alone. According to a report from The Insight Research Corporation, the total U.S. managed services market will grow from $34.4 billion in 2006 to $93.9 billion in 2011, at a CAGR (compound annual growth rate) of 22%. That's definitely a big market opportunity. But, just what are managed services? Depending on whom you ask, you'll likely get different answers.

If you ask Jason Waldrop, CEO of Connected WorkPlace Solutions (CWPS), an integrator and MSP (managed services provider) in Chantilly, VA, he says, "Managed services can be defined as IT services delivered in a defined manner with a predictable expense for customers." That may be one of the most succinct descriptions of managed services I've heard to date. "It's clear that customers are willing to pay for managed services," continues Waldrop. "What's not clear is how VARs and MSPs can leverage that market opportunity." Waldrop knows all about managed services challenges. For the past seven years, he's struggled to build his managed services practice to complement his project-based VoIP income. As we all know, there is no playbook to build a managed services practice. However, Waldrop's struggles and successes might provide aspiring MSPs with the closest thing to a road map to managed services success.

Decide Why You Want To Provide Managed Services
Managed services is not right for every VAR. If you're jumping into managed services just because you heard it was the next big trend, you may be making a mistake, because you may have to make some serious changes to your business to be a successful MSP. To start, it's important to clearly understand why you want to get into managed services. In the case of CWPS, it's logical to ask, why would a successful VAR with more than $37 million in annual sales look to change its business model to include managed services? The answer to that question may surprise you. "I really didn't see that we had a choice," explains Waldrop. "We had to develop an IT managed services practice to keep up with demand for customer support. I felt like we were going to get killed as a business if we didn't develop some managed services structure to control the volume of support calls."

The extreme service demands that CWPS experienced came as a result of the company's technical expertise in VoIP — the practice of using the Internet as a transport for phone service. Many of those VoIP customers approached CWPS to perform network support in addition to VoIP support. "The biggest challenge for us was that those support calls were so sporadic," says Waldrop. "We wouldn't hear from customers for weeks. Then, several customers would call at the same time with emergencies. It was always a fire drill when customers would call with support issues. It was very hard to predict our staffing levels to properly handle incoming service calls."

That business staffing problem was hurting CWPS. Customers were frustrated when they contacted CWPS during periods of high call volume. The company had no dedicated support engineers to handle incoming support calls or any idea of when to expect those calls. "We knew we needed to provide better support, but we were not equipped to have technicians sitting around waiting for phone calls from customers," explains Waldrop. "We had to develop a managed services system that would allow us to actively monitor what was happening with our customers' networks and set the customers' levels of expectation to a reasonable level, and it had to be profitable."

That wasn't the only reason Waldrop made the move to managed services. CWPS started as a traditional reseller and moved into the solutions provider business in 1997. Because CWPS primarily sold to the government, Waldrop says the business was not positioned correctly to grow. He didn't want to have complete reliance on just a few big government customers to generate all of the company's revenue. "When you're a business in growth mode, you can't afford to sit back and wait for government accounts to buy." To lessen dependence on government accounts and provide better service to new and existing customers, Waldrop decided to add a managed services practice that focused on the SMB segment in 2000 — before the term managed services was 'en vogue.' The solution Waldrop came up with is called IT Assist — CWPS' branded managed services offering.

Prepare For Managed Services Business Challenges
Making the decision to move to managed services was the easy part for Waldrop. However, he soon found there was a lot to learn. For instance, it took CWPS seven years to fully refine a service contract that Waldrop was happy with. Changes in the contract happened primarily due to the different needs and expectations of customers. "I don't think there can be such a thing as a 'cookie cutter' contract," says Waldrop. "Every MSP has different services it delivers to different types of customers." The lesson here is that developing a contract to clearly define your SLA (service level agreement) is no small task. If you're looking for a good place to start, consider joining the MSP Alliance (www.mspalliance.com) and the MSP Partners (www.msppartners.com). Both organizations provide members with great benefits such as training and open forums to communicate with other MSPs.

Another challenge was in the services to be offered to customers. CWPS used to offer two different types of managed services for IT. The first was a model that charged the customer a single monthly fee and included all IT services, including access to the CWPS help desk. Waldrop found that some customers were calling even though they did not have problems. In one instance, CWPS had a customer that would call and ask about how future revisions to applications might affect its network. "That was not the way in which our managed services were designed to be used," laughs Waldrop. The second package charged customers for IT monitoring services and then charged additional fees for technical services on an à la carte basis. "We found that CWPS and our customers preferred the latter," says Waldrop. "Customers chose this plan because once we have our managed services framework in place, our customers' IT systems generally run with fewer problems, because we perform the routine system patching and watch for problems before they happen. After some analysis, many of our customers realized it would cost less to 'pay as you go' for help desk items." CWPS preferred this method because it limited the number of what could be termed 'noncritical' calls coming in to CWPS. Customers would only place calls when there were problems they were willing to pay to have resolved.

How much do CWPS' customers pay for those services? "In a typical 30 PC SMB environment with five file servers, we would most likely have a technician on site for at least three hours per week to perform routine maintenance," explains Waldrop. With the flat managed services fee and the hourly rate paid for our on-site technician, that customer would pay in the $3,500 to $4,000 per month range ($48,000 maximum annual cost) to have fully managed IT services." Does that sound like a lot of money to you? What would it cost your customers to hire Microsoft- and Cisco-certified technicians like CWPS' to run that network? It's doubtful those salaries would be less than $60,000 per person with benefits — and that should be one of your lead pitches to sell managed services.

Another real problem for Waldrop was changing his employees' mindsets to adjust to managed services. "The managed services framework isn't just hardware or software," he says. "It also consists of a technically competent staff that understands your managed services model." For instance, some of his operations employees were resistant to the production of monthly customer services data — a paper packet showing services delivered to the customer that month — a packet that is critical to the renewal of customer contracts. "The reason for that resistance is that it is a lot of work to put together that packet," says Waldrop. "We don't have that process automated yet. I tell my people that I need them to think differently. They have to be the catalysts to automate processes like that. If they don't start thinking that way, we need to get out of the managed services business." Instead of having multiple people each handle a certain number of accounts, Waldrop wants his team to create a set of managed services solutions that can be replicated and delivered to multiple accounts by one person. Waldrop adds candidly, "That is a challenge we have not solved yet, but we are diligently changing our employees' ways of thinking."

Click here to read the January 2008 cover story on managed services success.

Interestingly, Waldrop has some limitations in mind for the growth of his managed services practice. "I don't think that you can have an infinitely growing managed services practice," he says. "VARs must look at what they want their practices to be when fully developed." Waldrop advises companies to determine how much cash flow they expect their managed services practices to produce, then estimate how many customers it will take to achieve that income. "Once you've grown your practice to those numbers, be prepared to close it [not accept any new customers]. I ask myself, 'Can CWPS really deliver quality IT services to more than 200 companies? Can I really find the 40 technical people to run this business effectively?' I don't know. We want this business to produce at least 30% net margins and provide a premium, quality service to our customers. I think our total realistic capacity is in the 2,500- to 5,000-seat range. Once I reach the upper limit, I am going to have to reevaluate if we can maintain our service levels while growing any bigger."

Even if there is a size limit to a managed services practice, there's little doubt that managed services provides a strong market opportunity for the right types of VARs. As CWPS has learned, it's important to determine your business case for getting into managed services, since managed services requires different applications and a different mindset from your employees. Remember to sell managed services based on the value that your company can deliver as contrasted to the customer managing their IT infrastructures in-house. Those services are most effectively sold as the result of project-based work. Clearly define the services you will deliver, and design a contract that accurately reflects your SLA commitments. Finally, charge fees that will allow your customers to save money while producing the margins you need to operate profitably. Certainly, these are not all of the issues you will need to consider when determining if you're a good fit for managed services. However, if you heed the advice of a successful MSP like CWPS, you'll be in a better position to earn your share of the projected $93.9 billion managed services market opportunity.